MATERIAL: GENERAL INTRODUCTION

Material is defined as all the tangible material assets of an organization other than its fixed assets. It is
also called stocks, stores, merchandise and inventory. Stock consists of :
i. Raw material
ii. Work –in – Progress
iii. Finished goods
iv. Merchandise ready for sales
v. Materials to be incorporated into a finished product (i.e. component parts)
vi. Consumables such as stationeries

NATURE AND CLASSIFICATION

Material is the same thing as stock or inventory. Its classification will depend on the nature of the
business. What is material items to some business may be assets to some other business. A company
manufacturing car will have it as stocks for sales while some company into another business will have
those cars as assets.

MATERIAL MANAGEMENT
This is about planning on how to get materials for the company. It borders on the type of stocks to buy,
where to buy, when to buy and for how much

CATEGORIES OF STOCK COSTS

There are four categories of stock costs which makes the total cost of a stock:
1. Purchase Cost: This is the amount paid for each stock item. It could be fixed and it cloud vary. It
is fixed if no discount is given while it varies if discount is given.

2. Ordering Cost: This is the cost incurred to make order for the stocks to be purchased. It includes
the following:
 Transportation cost i.e. carriage inward
 Administrative costs associated with purchasing, accounting and receiving goods
 Set-up and tooling costs of production run for goods manufactured internally

3. Holding / Carrying Cost: This is the cost of keeping the stocks in the ware-house. It includes the
following:
 Forgone interest on capital
 Storage charges e.g. rent, light and heating
 Store administration cost i.e. staff salary, equipment maintenance and handling charges
 Insurance and security
 Pilferages and damages
 Stock taking
 Handling costs e.g. cost of packing and unpacking stocks

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 4. Stock out Cost: This is the cost of running out of stock. It includes the following:
 Loss of contribution
 Loss of future sales
 Loss of customer goodwill
 Loss of production stoppage i.e. idle time payment
 Labour frustration over stoppage which may lead to labour turnover
 Extra cost of urgent replenishment purchases

PURCHASING PROCEDURES
Generally the following purchasing procedures are to be followed:

Requisition Form: This is the document used to initiate purchases or place an order. It is issued from the
store or by the production department or the desiring department where the material does not pass through
the store to the purchasing department. The following essential information should be included in the
form:
 Name of the department making requisition
 Date of requisition
 Requisition No.
 Code and description of Material
 Quality and quantity required
 Expected date of delivery
 Authorized signature

Purchase Order: This is the document used to order for materials needed. It is sent from the purchasing
department to the supplier. The document is signed by the authorized signatory. The following essential
information must be included in the form:
 Description of the materials required including quality
 Quantity and price
 Name and address of the supplier
 Required date of delivery
 Signature of the purchasing officer

A copy of the purchase order is sent to the following departments:

i. Department making requisition i.e. for the department to know that an order has been placed
ii. Stores department i.e. for preparation for the receipt of the goods on delivery date
iii. Accounts i.e. for purpose of payment

Receipt and Inspection of Materials

When goods are received, they are checked for quantity and description against the delivery note (DN)
and purchase order. If they are satisfactory, a Goods Received Note (GRN) is prepared. If the goods do
not meet the specification or purchase order, they are returned immediately to the supplier if possible. If
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not, they are stored separately and marked to be returned. Rejected goods should be covered by a debit
note.

Payment to Supplier
The final stage is the payment to the4 supplier which is done in the accounts department. The supplier’s
invoice is received by the purchasing department. This invoice is compared with the delivery note,
purchase order form; goods received note and inspection note (where necessary). The quantity, price and
discount are also checked after which the invoice is forwarded to the accounts department for further
verification. If satisfactory, the accounts department will certify the invoice for payment according to the
terms of payment agreed.

Recording of Stores
There are two main documents for recording the quantity of materials held in the store. They are:

The Bin Card or Stock Card Kept in the Store

A bin card shows the level of inventory of an item at a particular stores location. It is kept with the actual
inventory and it is updated by the storekeeper as inventories are received and issued. It is kept in the store.
A typical bin card is shown below:
BIN CARD
Bin number -------------------- Location -----------------------
Material code --------------------- Store ledger number -----------------------
Description ---------------------
Receipts Issues Balance
Date GRN No. Quantity Date Requisition Quantity Inventory
No Balance

The bin card does not show the monetary value of materials. It is just the quantity received and issued.

The Stores Ledger Card or Account

The stores ledger card or account is kept in the accounting office and form part of the accounting system.
This shows the monetary value of materials received and issued. A typical store ledger is shown below:

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 STORE LEDGER CARD / ACCOUNT
Material ---------------------- Re-order Level ------------------------------
Code ---------------------- Re-Order Quantity ------------------------------
Maximum Quantity ------------------------------
Minimum Quantity ------------------------------
Date Receipts Issues Inventory Balance
GRN Qty. Unit Amt. Requisition Qty Unit Amt. Qty. Unit Amt.
No. Price No. Price Price
N N N N N

Perpetual Inventory System

This is a system of stock control where records are kept as a perpetual record of receipts and issues of
materials. This is to say that the stock record is updated each time there is receipt or issue of material. This
makes it possible to know the stock level at any point in time. The two perpetual inventory records are the
bin card and the store ledger card

Stock Taking
This is the physical counting of materials in the store. There are two types of stock taking methods
namely:
1. Annual / Periodic Stock Taking
This is a method of stock taking that counts and value stocks at the end of a given period usually
quarterly, ½ yearly or annually

Advantages
i. It is less expensive
ii. The inconveniencies of regular or frequent stock count is avoided

Disadvantages
i. It may require a disruption of operation activities at the end of the year when stock take is
to be taken
ii. The rate of inaccuracies may be high due to large no. of work involved
iii. It may increase theft and pilferages that ought to have been noted earlier and corrected

2. Continuous Stock Taking

This is the counting of physical quantity of materials in store s regularly, a few at a time, until all
items are checked at least once a year. Stock items are counted at frequent intervals on a random
rotational basis and the results of the counts are reconciled with the corresponding figure on the
bin card. This stock take is usually carried out by an expert who is not a member of the store
department
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 Advantages
i. It is deterrent to pilferage and theft
ii. The closure of store for an annual stock count is avoided
iii. Discrepancies are discovered earlier and remedied more promptly
iv. The store system is kept constantly under review
v. It enhances effective stock control

Disadvantages
i. It is expensive to operate

Causes of Stock Discrepancies

i. Incomplete entries causes by non completion of original document
ii. Casting errors on the stock records
iii. Over or under issue due to carelessness of the issuing officer
iv. Recording material in the wrong stock record
v. Movement of stock without proper documentations
vi. Pilferages and theft
vii. Loss due to breakage and evaporation
viii. Inaccuracies in the stock count caused by:
a) Omission b) Double counting

METHODS OF MATERIAL ISSUES, PRICING AND VALUING STOCKS:

1. First –in First- out (FIFO) Pricing Method
The FIFO method is based on the assumption that materials are issued out to production according
to how they are received i.e. the materials received earlier are issued out to production as they
come to the store. This means that the oldest costs of goods are assigned to the units that are
transferred out of store first and the closing stock is measured by the cost of units most recently
acquired.

Illustration 1
The following materials are received into store as follows:
Date Units Price (N)
February 2010:
12 180 5.00
15 150 6.00
21 240 4.50
The store keeper issues out 350 units to production on the 24 th of February. What is the cost of goods sold
and value of closing stock?

Advantages
i. It is simple to calculate
ii. Stock is valued using recent price

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 iii. It uses actual price
iv. It issues materials in order of receipt
v. It avoids materials becoming obsolete

Disadvantages
i. It is difficult to compare jobs because different prices of materials are used
ii. The issue price may not reflect current economic value
iii. Stock with low turnover will tend to be priced at old prices
iv. In times of inflation, product cost may be low while replacement cost is high, thus profit
may be overstated

2. Last-in First-out (LIFO) Pricing Method

This method assumes that the latest materials received are issue out to production first. This means
that the latest cost of materials are assigned to stock issued to production while closing stocks are
valued using the oldest cost of materials
Illustration 2
Using Illustration 1, what is the cost of goods sold and value of closing stock using LIFO method
of pricing issue?

Advantages
i. It is fairly simple to calculate
ii. The issue price is near to the current economic value

Disadvantages
i. It is not realistic as it is contrary to normal issue procedures
ii. Stocks value may significantly be understated

3. Weighted Average Pricing Method

This method uses the average price of FIFO and LIFO. It averages prices after weighing different
prices by their quantity with each receipt of material. The weighted average price is calculated
each time there is a fresh receipt of goods and this price is used to value the issue of materials to
production and closing stocks

Illustration 3
Using the same information in illustration 1, calculate the cost of goods sold and the value of
closing stock

Advantages
i. It smoothens out fluctuations in issue prices
ii. The comparison of different jobs is easier
iii. Stocks are valued at price reasonably related to the current conditions

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Disadvantages
i. Calculations have to be made to approximated figures
ii. Issue of price may not reflect current economic values

Example 4.3 of Coping with Cost Accounting, page 64

Other Methods of Materials Issues Pricing Include:

Replacement Cost
This method uses current market price to issue material to production and value closing stock
regardless of how much the stock were actually bought. It is mostly used for short term decision
making.

Standard Price
This is often part of a standard costing system. A pre-determined price is set after taking into
consideration factors which may influence the prices of materials in a future period. The pre-
determined price is used in pricing out all issues of materials to production

Base Stock Method

Certain units among the first batch of purchase are regarded as not available for issue.
Consequently in every stock-taking, the safety stock is always carried at its historical cost. Any
units above the safety stock can be issued to production using pricing method desired. The base
stock represents a permanent commitment of resources like that of the fixed asset.